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Ocean Resources Capital Hldgs LSE:OCE London Ordinary Share GB0033595496 ORD 1P
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  +0.00p +0.00% 13.00p 0.00p 0.00p - - - 0.00 05:00:10
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- - - - 11.60

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22/9/200700:41Ocean Resources Capital Holdings Plc. (OCE)472.00

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DateSubject
07/7/2007
16:58
richardly: Edited email: --------------------------------------- Friday, July 06, 2007 9:56 AM Friday's recommendation on UK-AnaIyst.com comes from GE&CR and is an increase in its valuation of Archipelago Resources Archipelago Resources - Speculative Buy at 25.5p - Target 59p Key Data EPIC AR. Share Price 25.5p Spread 23p –28p Total no of shares 136.42 million (undiluted) Market Cap 34.79 million pounds 12 Month Range 23.5p – 40.5p Market AIM Website archipelagoresources.co.uk Sector Resources Contact Colin Loosemore 00 618 9364 8301 Archipelago Resources, the AIM listed mining company with operations in Indonesia, Vietnam and the Philippines, has experienced delays in receiving environmental operating documentation (AMDAL) approval for its flagship gold Toka Tindung prospect in Sulawesi, Indonesia. This has caused shares in Archipelago to fall sharply to 25.5p valuing the company at just £34.79 million. However, we believe that the project will clear this final regulatory hurdle over the coming months and that if it does so the potential of Toka Tindung is far from discounted. We forecast that this one project will leave Archipelago generating earnings per share of 15p by calendar 2009 and on a heavily risk weighted basis we value Toka Tindung at 59p per Archipelago share. On that basis, at 25.5p, our stance is speculative buy. The delay to AMDAL approval and commencement of operations has added to the costs of the Toka Tindung project, however a reduction in projected operating costs and the increase in the gold price over the past 12 months means that Archipelago can now present a more robust economic case for this mine than it has been able to do in the past. When publishing its calendar 2006 results on 22nd June 2007, Archipelago forecast its operating costs over the mine life would be $291 oz - it had forecast $305 oz – as a result of pit design changes. Even with a model using a gold price of $600 oz (the current spot is $656 oz) the estimated net present value of the project is $160million (£79.5 million) and the internal rate of return before tax is 107% while the average EBITDA over the first 5 years of the mine is set to be $51million (£25.3 million) The company is confident that AMDAL approval will be forthcoming from the Indonesian Government by the end of August this year. Archipelago is actively pursuing the matter with the Indonesian authorities at the highest level, in an effort to resolve the matter as quickly as possible, allowing the onsite plant construction at Toka to recommence. The Government so far has shown clear intent to honour its project related obligations (termed as Contract of Work – Cow), after the Deputy for the State Minister of the Environment confirmed to a Parliamentary Committee earlier this year that the company's AMDAL Assessment Commission was acceptable for approval purposes. Archipelago has spent much of last year in producing comprehensive AMDAL documents and complying fully with due process. As a result of these delays and given the conditional nature of the project's finance arrangements, the company was forced to temporarily suspend construction activities at Toka Tindung, pending approval of the environmental documents (AMDAL). This prevents the company from drawing down the $46.7 million syndicated project finance facility arranged by Investec Bank in order to complete construction of mine facilities and allow commencement of production, initially targeted for early 2008. So far considerable civil works have been completed at Toka, including the preparation of the process plant construction site and construction of three dams for water supply and sediment control. In addition, a jetty has been constructed together with a 7 kilometre road linking it to the plant site. The Toka Tindung Gold project has a resource of 1.75M ozs of gold, of which at least 0.96M ozs will be mineable by open pit. A combination of current gold prices and recently reported encouraging drilling results point to the possibility of open pit mining going beyond the 0.9M oz threshold. The mine plan has a 6 year life span and is targeted to achieve production at a rate of 160,000 oz per annum. At 25.5p, Archipelago is valued at £34.79 million. In initiating our coverage of Archipelago in March 2006, we estimated that the Toka Tindung project alone could be worth more than 45p per share. We expect that environmental approval will be forthcoming in the next two months which will allow the plant construction to be completed by the end of March 2008. With plant and mine commissioning likely to take an additional two months we expect production to begin during the second quarter of 2008. In our valuation of Toka, we assume a modest production target for 2008 of 84,000 oz of gold and gold equivalent rising to 160,000 oz from 2009. We estimate with an indicative base case gold price of $600/oz and 7.5% discount factor, the project as it stands has a Net Present Value of £96 million, worth £90 million to Archipelago or 59p per Archipelago's share on a fully diluted basis. On the basis of improved project economics, we increase our base case valuation to 59p, and hence at 25.5p, we maintain our stance at speculative buy. Year to 31st December Sales (Million US$ dollars) Pre-tax profits (Million US$ dollars) EPS (pence) Number of shares in issue (million) 2005A 0.00 (1.01) (0.62) 84.18 2006A 0.00 (2.80) (1.17) 122.53 2007E 0.00 (3.53) (1.33) 136.42 2008E50.0022.95 7.74 152.00 2009E100.0044.50 15.01 152.00 (Exchange rate used £1.95: US$1) Background Archipelago Resources was established in 2002 by Colin Loosemore, the current Managing Director, with the purpose of creating an Asian gold exploration and production company with a broad regional outlook on the Southeast Asia region. Loosemore was part of the original team that brought explorer Brancote Holdings to AIM, which proved up a commercial gold and silver resource in Argentina before being bought by Meridian Gold in 2002 in an all paper deal. The deal netted early investors returns of around 2000%. Archipelago holds a portfolio of gold mining and exploration properties in: Indonesia, as an 85% owner of Toka Tindung Gold project in Sulawesi; in Vietnam, as majority holder in the Pac Lang and Cam Thuy/Ba Thuoc joint ventures with Vinacomin, a Vietnamese Government mining company and in the Philippines, as option holders over a 100% interest in the Corplex tenements. Source: Archipelago Resources Plc Toka Tindung Gold Project, Sulawesi, Indonesia The Toka Tindung Gold project is the company's principal project and comprises a system of epithermal veins containing a total resource base of 1.75 million ozs of gold defined by 158 kilometres of drilling, of which 0.96 million ozs will initially be mineable by means of five open pits. The Australian company Aurora Gold spent $56 million on the project in the mid and late 1990s, and by 1999 had proved up the current resource base. Aurora gained governmental approval to develop the site in 1998 but due to low gold prices in the late 1990s the project was not commercially viable. The project was subsequently acquired by Archipelago in February 2002 when the gold price was $280/oz. Since then the company raised approximately £38 million through equity (£33.08 million) and convertible loan finance (£5 million) issues. The remaining capital cost required to bring the project to production will be approximately $50 million. The AMDAL approval delay has added significantly to those project costs. The company has arranged working capital facilities with RMB Resources worth $25 million, whilst Investec Bank has put together a Project finance facility of $46.7 million. The project is located on the North-eastern edge of the Sulawesi Island in Indonesia, approximately 35 kilometres north east of Manado, the provincial capital of North Sulawesi. The property, the title to which is via two Contracts of Work - PT. Meares Soputan Mining and PT. Tambang Tondano Nusajaya, covers 404 square kilometres of well mineralized ground, but only a fraction of this has been explored. The company holds an 85% interest in the project, which has mineable reserves of 7.7Mt @3.7g/t Au and 9.2g/t Ag for 960,000 oz Au equivalent from a total resource base of 1.75Moz Au equivalent. Archipelago believes that further exploration could both extend the life of the project and, with a minimal additional capital outlay, increase its annual output and that would make a significant difference to its Net Present Value. However, at this stage that must be viewed as a speculative potential bonus to the base case valuation. The feasibility study on Toka Tindung has been updated by Archipelago to reflect current operating costs and the purchase of a processing plant from a Barrick Gold subsidiary's El Tambo project in Chile. Given the dry conditions at El Tambo and a limited three years of prior use, the processing and crushing ore equipment is in very good condition. Operational Review Toka Tindung Mining at Toka Tindung will be by way of five open pits with processing through a centralized CIL (Carbon in Leach) plant, with indicated gold recovery rates of 94%. The main Toka pit, on the north of the licence area, is located within a few kilometres of the other four distinct deposits in the eastern part of this concession. The main pit itself contains around 525,000 oz of the 960,000 mineable ozs discovered to date, and so it has the largest single pit and the processing facilities are being built closest to it. The Pajajaran and Blambangan open pits have mineable reserves of around one third the size of Toka Tindung, whilst the two remaining pits, Araren and Kopra are smaller in size. Archipelago awarded the mining contract to Leighton Contractors Indonesia, the Indonesian arm of the Leighton Group, Australia's largest development and open pit mining contractors. Toka TindungResourcesMineral Inventory ResourcesMineral MineralMineral MineralMineral MineralMineral Mineral ResourcesReservesResourcesReservesResourcesReservesResourcesReserves DepositMtMtgAu/tgAu/tgAg/tgAg/tAuEqoz(000s)AuEqoz(000s) Toka Tindung7.94.52.93.55.06.4760.0525.0 Pajajaran1.60.84.45.318.024.0240.0144.0 Blambangan1.90.93.64.613.019.0230.0135.0 Araren1.60.62.93.93.03.1150.077.0 Kopra1.00.53.03.56.06.2100.062.0 Bima*/low grade1.40.45.71.29.03.4260.018.0 TOTAL15.57.73.43.78.09.21750.0961.0 *Bima not included in mineral inventory Source: Archipelago Resources Plc Five open pits Source: Archipelago Resources Plc The company undertook preliminary work on the project last year which included levelling of the processing plant site, completion of a workshop/warehouse, administration building and offices. In January this year, the processing plant was transported successfully on to the site and with further bank finance facilities agreed, the construction of the plant progressed rapidly until it was put on hold in May because of the delay in receiving AMDAL approval. The company has installed its own wharf and significant earthworks and water management structures and systems were completed following the completion of a $3.5 million earthworks contract by Leighton Contractors. Work on the processing plant continued until the recent suspension of operations, with the placing of plant foundations and the delivery and erection of structural steelwork already completes. This was undertaken following a contract awarded to Bakrie Construction for the delivery and installation of all concrete structures. Following testing of plant components and electrical motors, process control and electrical systems, the erection of the plant superstructure is now at an advanced stage. Source: Archipelago Resources Plc The processing plant is in good condition and is being refurbished prior to installation with new structural steelwork, piping and cabling in place. The crushing and grinding circuits are also in good condition and are considered suitable for the scale of operation proposed. Completion of the plant construction was scheduled for end of August 2007, however given the delays the company is facing; completion has been put back by seven months. Mine commissioning is the next stage of the project and this is likely to take 4-6 weeks, with mining set to commence at the Toka Tindung pit initially. The second pit at Pajajaran is set to come on-stream nine months later, the third pit at Blambangan in year two, whilst the two smallest pits will go into production thereafter. Production was scheduled to commence in late 2007 at an initial rate of 140,000 oz per annum rising to 160,000 oz in 2009 for an initial 6 year mine life. This will now be delayed by a seven months. Given the current high gold price and good exploration potential at Toka Tindung, the company is confident of extending the operational life of the mine. Following the delays in securing environmental AMDAL approval, commencement of production is now scheduled to start in the second quarter of 2008. Our forecasts and valuation models reflect this change in production timelines. Environmental (AMDAL) and Permitting Issues The contract with Leighton Contractors included construction of roads, dams and drains, a stream diversion channel, water management structures and dams. These allow in future the Koba Stream on the south of the area (see Tailings Storage facility map below) to be diverted around the planned open pit to flow through a series of settling, treatment and polishing ponds before the water will be released back into the environment. Due to the successful implementation of a drainage and water management plan, treatment of affected run-off and mine water will be monitored on a daily basis to ensure it complies with environmental regulations. These are critical issues in a site with regular heavy rainfall, and the company has ensured they have been addressed in consultation with recognized consultants. A waste pre-stripping process will commence in March 2008 for the first lift of the tailings dam together with stockpiling of ore for plant commissioning, using the company's contract mining fleet. These comprise of 20 Caterpillar 40t articulated dump trucks, 3 hydraulic 85t excavators, and 3 Tamrock Pantera 1500s. Source: Archipelago Resources Plc The tailings disposal strategy was originally proposed to be submarine based, but was subsequently changed to land-based, following feedback from the local authorities. This resulted in re-submission and a subsequent delay in approval. The final revised documents were submitted in November 2006, and following extensive review, they were declared acceptable by both Central and Provincial Government technical teams. The process, leading to anticipated formal approval by the Environmental State Minister, enjoyed the support of the provincial Governor of North Sulawesi up and until February 2007. That support has been withdrawn in recent months on the basis of a number of purported issues, even though these documents were fully reviewed and accepted as part of the AMDAL Assessment Commission due process. The issues revolve around 'community rejection', 'appropriate process technology' and 'provincial spatial planning'. The company believes that it has addressed these issues as part of the AMDAL assessment process and due diligence. On the first issue, according to a survey undertaken by the University of Sam Ratulangi (UNSRAT) in Manado, North Sulawesi, the company enjoys 80% local community support. On the second issue, the company has satisfied the authorities that it can achieve World Bank and even Australian National Park standards for the release of surplus water, both far more stringent than the Indonesian equivalent standards required for AMDAL. On the planning issue, the company has satisfied the authorities on being fully compliant with all permitted activity regulations. The company therefore believes that there is no basis for the concerns raised and is currently engaging the relevant authorities in order to address these issues and re-establish full support for the project and hence positive resolution with AMDAL approval. Capital Raisings Since the company's original admission to the AIM market in September 2003, seven equity fund raisings have brought in £32.53 million which enabled Archipelago to finance project development and update the feasibility study to bankable status, assemble a development team and purchase most of the equipment necessary for a mine and processing plant. The largest and the most recent equity issue in April 2006, saw the company raise £15.1 million through the issue of 37.78 million shares at 42p per share to institutional and private investors. This funds will largely be used for the construction of the Toka Tindung Gold project, and to a lesser extent to cover exploration activities and corporate operating costs. Prior to its move to AIM, Archipelago raised £5 million and £0.55 million in two convertible note issues and two equity issues respectively for working capital purposes. Since its move to AIM the financial position of the company has been made more secure by the backing of its major shareholder, Ocean Resources, which has a 24.26% stake in the company and has been supportive of all its fund raisings. More recently, the company has received the backing of RAB Capital, JP Morgan, Goldman Sachs and Credit Suisse First Boston. Project and Corporate Financing Following the 2005 year end, Archipelago secured a US$42.5 million syndicated loan facility, with NM Rothschild (now Investec) as lead banker. Those funds will be used for the Toka Tindung project development. Part of the consortium's debt financing package, was the requirement to hedge by way of forward sale approximately 365,000 oz for which it will receive a premium of roughly $35 oz above the then current spot gold price. The company currently has in place put options providing a minimum floor price for 20,000 oz of production. Archipelago has worked closely with Investec Bank to put in place a comprehensive package of project, ancillary and contingency finance sufficient to fully fund project development at Toka Tindung. The syndicated project finance facility (PFF) arranged by Investec Bank was, in March 2007, increased from $42.5 million to $46.7 million, in recognition of the improved project economics at Toka Tindung. The recent willingness of the Project Finance providers to consider put options as a partial and temporary alternative to forward sales offsets some of the increased costs resulting from the AMDAL approval delay. As a result of the delay to the issue of environmental approval necessary to commence mining and processing operations and the conditionality of the PFF, RMB Resources is providing additional subordinated loan facilities for working capital purposes of around $25 million. The $25 million finance package announced in March this year involves three separate facilities. A $5 million Corporate facility is intended to fund exploration programmes in Vietnam and China. A $10million Standby facility will provide pre-production funding for the Toka Tindung project and cover unforeseen events especially those occurring during commissioning, such as delays, breakdowns and natural disasters. The third facility is a $10million Bridging facility, which was intended to provide up to 6 months of working capital funding until AMDAL environmental approval is received and the drawdown of the PFF can begin. Both Investec and RMB resources have worked closely to dovetail their respective facilities in order to provide an uninterrupted stream of working capital and project development finance to Archipelago's Toka Tindung gold property. The Investec and RMB Resources loans share common security over the company and project assets in first and subordinated ranking respectively, apart from the Bridging facility which holds first ranking until repayment. Additional Loan facility The drawdown of the bridging facility took place in March 2007 and it is repayable in September 2007. As a result of the temporary suspension of construction activities at Toka Tindung, Archipelago is currently seeking a longer term financial arrangement and one of the proposals being considered is a US$20 million long term loan facility with options exercisable at a 20% premium to the share price in May when the offer was made at 36.6p. In addition, a further $5 million standby facility will also be made available, ensuring that Archipelago is in a position to repay the bridging facility, meet all current obligations, continue exploration in Vietnam and China, and pursue AMDAL approval. As a result an EGM was convened in London on the 15th of June, whereby the company's management sought shareholders approval to allow the proposed capital raising to proceed. It is estimated that the additional shares to be issued will range from 10 – 40 million, including an additional 2.5 million options issued to RMB. Whilst this would represent a maximum dilution of about 30%, there would be a substantial capital injection into the company. Economic Model and sensitivity The financial model reviewed by prospective project financiers, indicated an after tax NPV of $103m based on a $550/oz gold price, an after tax IRR of 49% and an average EBITDA over first 5 years of $39m per annum. Even though delays in the raise of loan finance and progress development of the Toka project meant that Archipelago was facing higher material and capital project costs, the company was able to defer gold price hedging obligations as per the syndicated debt finance requirement. As a result the company remains fully exposed to the increase in gold prices since 2005, which has resulted in the company improving its financial and projected cashflow position. The company's indicative base case financial model for Toka Tindung was subsequently revised as a result of higher gold prices and lower cash operating costs due to changes to the open pit design. At gold price of $600/oz, below the current spot $656/oz, the company should generate an annual EBITDA of around $51 million and Toka would command a Net Present Value of $160 million. Other Projects Archipelago holds three exploration licence applications in northern Vietnam, a well mineralised country that has only recently received noticeable attention from western exploration companies using modern exploration technology. In addition the company owns the right to acquire a 100% interest in Corplex gold prospects in the North east Mindanao in the Philippines. Pac Lang Gold Project, Vietnam In June 2006 Archipelago entered into a joint venture with Bac Kan Mineral Joint Stock Co. and VIMOCO to explore for gold and associated minerals. VIMICO, which is authorised by the Vietnamese Government to assist with foreign investment within Vietnam's resource industry, is an affiliate member of nationals minerals company VINACOMIN (Vietnam National Coal-Minerals Industries Group). The joint venture vests Archipelago with a 65% interest in the property with the company undertaking to spend US$1.24m on exploration within two years of the date of grant of the ELA. The remainding 35% interest is held by Bac Kan and VIMICO. The parties have submitted an exploration licence application to the Vietnamese authorities, and it is expected that approval will be forthcoming during the next few months. The Pac Lang Gold project is located approximately 160 kilometres north of Hanoi in the Ngan Son district of Bac Kan Province. The property, which hosts gold mineralised quartz veins groups, was explored by the French and became a major gold rush site in 1990-91 following discovery of a large high grade quartz vein. At least 15 gold mineralised mesothermal quartz veins, generally less than 2 metres wide, have been identified with a combined outcropping and inferred strike length of 3,300m. Previous preliminary sampling reported assay results of between 0.4-49g/t Au. Exploration will commence as soon as the ELA approval is granted, and the focus will be on a mineral resource definition within known gold mineralization areas. Cam Thuy-Ba Thuoc Gold Project, Vietnam The gold district covers two applications located on the Ma River fault system, a parallel structure to the major Red Rive fault, hosting copper-gold mineralization in Vietnam and southern China. The main targets in the licence applications, lodged in the name of Archipelago and VIMICO, are two large fold structures within sediments considered prospective for large gold deposits. Corplex Projects, Mindanao, Philippines The company also had the right to acquire a 100% interest in Corplex Resources Inc, a Philippine registered company, which effectively gives Archipelago the option to own a number of exploration permit applications and mineral production sharing agreements (MPSA). The Corplex projects are located in the gold-copper rich Surigao peninsula of North East Mindanao, Philippines, which host the high-grade Boyongan copper-gold porphyry, discovered by Philex Mining and Anglo American. Other Developments and Growth Opportunities Having secured a $5 million corporate facility from RMB Resources in March 2007, the company is looking to acquire exploration properties in Vietnam and China, and commence exploration in existing properties in Vietnam and the Philippines, once tenement approval is granted by the respective authorities. With production at Toka Tindung scheduled to start sometime in 2008, the possibility of extending the life of the mine beyond the initial 6 year life mine is very real. Only a fraction of the Toka license has been explored and there is every possibility that the total resource can be increased as a result of further exploration activity. Management Managing Director and founder of the company, Colin Loosemore is a Royal School of Mines trained geologist and a Fellow of the Australasian Institute of Mining and Metallurgy, with over 34 years experience in multi-commodity exploration within Australia and overseas. His association as a former Director of Brancote Holdings Plc, the first company to list on AIM has been a key selling point with British investors. Mr Loosemore also served in the past as Managing Director of ASX listed Carr Boyd Minerals Ltd and Hill Minerals N.L. The other two main board directors are non executive: Michael N Arnett, also an ex-Brancote director and a partner and formerly Chief Operating Officer in the Sydney office of law firm Deacons, and has been involved in several AIM and ASX floats. Barry J Casson is a chartered accountant and has been involved in the corporate finance world for approximately 29 years, mainly engaged in the mining sector, and sits on the Board of other listed companies. Whilst at Boardroom level, Archipelago is overly dependent on Loosemore, it is expected that as Toka Tindung progresses towards production, the Board will be strengthened. At an operational level, Loosemore has assembled an experienced team of Southeast Asian gold mining managers led by General Manager Peter Brown. Other members of this team include Dave Morrison (Project Development Manager), Larry McGeehan (Construction Manager), Chris Stephenson (Commercial Manager), Terkelin Purba (Government & Community Relations Manager), Alistair Frowde (Geology Manager), Dean Pontin (Mining Manager) and Mark Warman (Security Manager) Results, Balance Sheet and Cashflow On 22nd June 2007Archipelago published its results for the year ended 31st December 2006. The company reported an operating loss of $2.803 million, up from $1 million in 2005, as a result of significant exploration and development work, mainly at Toka Tindung. The loss per share on a fully diluted basis was 1.15 pence or 2.2 cents, up from 0.6p in 2005. Cash balances at the end of the period were $9.92 million, up from $8.87 million 12 months previously. The increase in operating losses is partly due to a higher fair value change on derivatives charge in its P&L at $1.178 million, up from $0.972 million – this is the result of a revaluation of gold put options . Significant exploration and development work resulted in the company increasing its balance sheet fixed assets figure by 144% to $11.75 million. The value of property, plant and equipment doubled to $34.685 million, up from $17.736 million. Risks and Opportunities The biggest single risk is that Archipelago will fail to obtain AMDAL approval from the relevant authorities or will suffer further delays in the granting of approval. As the company recognizes that this is the biggest obstacle in progressing its principal property at Toka Tindung, it is currently concentrating its efforts to resolve the matter with the relevant authorities. Should the company face further delays beyond the expected 7 months delay, this will increase the costs of the project. We consider it highly likely that AMDAL approval will be granted but if it is not then Archipelago's shares may lose most of their value. With project financing arrangements currently in place, and should the AMDAL matter be resolved imminently, there are no other major project related issues to delay mine construction further. With the project financing conditional on AMDAL approval, the company is currently in negotiations with financial institutions over a longer term bridging and working finance facilities. The other main risk for the Toka Tindung project is the gold price. Since the costs of mining are already known and given that Indonesia has a stable and developed mining code and infrastructure, the generated cashflow at Toka will largely depend on the price of gold. Our valuation projections show that even if there isn't any expansion of the resource - which we consider unlikely, the project is economically viable at a price close to $450/oz. Under higher gold price scenario the NPV of the project rises sharply. We valued the project based on the company's 6 year mine life plan, and therefore should the company increase the resource base and decide to extend the mine life, the economic viability of the project will raise even further. We have provided an estimate of what the project can be worth with a 3 year extension. The great opportunity at Toka Tindung is that with less than 15% of the concessions having been explored there is a very real potential to increase the resource base and thus the annual output and mine life which would have a significant impact on Toka's NPV. Shareholdings There are 136.42 million shares in issue with 2.6 million options outstanding. Institutional investors account for 71.6% of the shareholding, Management holds 16.3%, and the remainder 12.1% is held by other investors. The following shareholder parties hold in excess of 3% of the issued ordinary shares in the company: Ocean Resources Capital Holdings Plc33,092,085 24.26% The Bank of New York (Nominees)8,801,850 6.45% Credit Suisse First Boston Client Nominees Ltd7,050,000 5.17% Mellon Nominees (UK) Limited6,822,400 5.00% Lando Pty Ltd 6,207,500 4.55% HSBC Global Custody Nominee (UK) Limited6,000,000 4.40% Michael Norman Arnett 5,488,225 4.02% John Colin Loosemore5,200,100 3.81% Goldman Sachs Securities (Nominees) Ltd4,926,000 3.61% Vidacos Nominees Limited 4,462,633 3.27% Valuation and Conclusion At 25.5p, Archipelago is valued at £34.79 million. We continue to regard the assets outside of Toka Tindung as being at such an early stage of development to be of minimal tangible value. The investment case therefore rests upon the value of the company's 85% stake in Toka Tindung. The main obstacle to realizing the value of this project is resolving the AMDAL approval issue and if that can be done the Toka Tindung Gold project will be in production by the second quarter of 2008. In our valuation of Toka, we predict a modest production target for 2008 of 84,000 oz of gold and gold equivalent, rising to 160,000 oz per annum thereafter We estimate with current gold prices of $600/oz the project as it stands has a Net Present Value of £96 million, worth £90 million to Archipelago or 59p per share. We consider this the base case valuation for Toka. Our profit and loss calculations for 2008 and 2009 project an EBITDA of US$27m and US$48.5m respectively, or profits before tax of US$22.95 million and US$44.50 million (2009) respectively. These equate to earnings per share of 7.74p (2008) and 15p (2009) on a fully diluted basis. Any extension over the mine's initial 6 year mine life will add significant value – we estimate that a one year extension would add at least 14p per share to the base case valuation. If Archipelago were to discover sufficient additional resource at Toka to allow a 3 year mine life extension, our estimate of Toka's NAV rises to £120 million, worth £110 million or a 73p per share to Archipelago. Clearly there is a risk that AMDAL approval is for some reason not forthcoming. We do not regard this risk as severe but if this project is blocked then Archipelago's value may be minimal. However with our base case valuation of 59p per share and with the very real potential for Toka's value to increase thanks to further exploration success in the area we regard the risk/reward balance as an attractive one. At 25.5p, and with a base case valuation of 59p, our stance remains speculative buy. Toka Tindung Gold Project Valuation @7.5% discount rate6 yr mine life+3 yr extension Mineable Reserves (M oz Au eq)0.961.42 Base case Project Value (£m) @7.5% discount96120 Base case Value to AR (£m) 90110 Base case @$600 oz/Au (pence)5973 Target price @$650 oz/Au (pence)6481 GECR Valuation estimates Year to 31st December Sales (Million US$ dollars) Pre-tax profits (Million US$ dollars) EPS (pence) Number of shares in issue (million) 2005A 0.00 (1.01) (0.62) 84.18 2006A 0.00 (2.80) (1.17) 122.53 2007E 0.00 (3.53) (1.33) 136.42 2008E50.0022.95 7.74 152.00 2009E100.0044.50 15.01 152.00 (Exchange rate used £1.95: US$1) This Research Note Cannot be Regarded as Impartial as GE&CR has been commissioned to produce it by Archipelago Resources. The information in this document has been obtained from sources believed to be reliable, but cannot be guaranteed. Growth Equities & Company Research is owned by t1ps.com Ltd which is commissioned by companies to produce research material under the Growth Equities & Company label. However the estimates and content of the reports are, in all cases, those of t1ps.com Ltd not of the companies concerned. t1ps.com Limited is regulated by the Financial Services Authority .This research report is for general guidance only and t1ps.com Ltd cannot assume legal liability for any errors or omissions it might contain. The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not necessarily a guide to future performance. The difference between the buy price and the sell price for smaller company shares can be significant. Before investing, readers should seek professional advice from a Financial Services Authority authorised Stockbroker or Financial Adviser.
10/4/2007
13:16
vassily: No one knows. Suicidal for sure. I expect OCE will not be wound up, but some other solution will be found. The share price should be much higher considering the gold price, etc.
01/10/2006
16:22
topvest: OCE looks increasingly like it will end up with only two good investments - Archipilaego and Rheochem. Both are doing well, but maybe the share price is being held back with both of these through the large overhang on the OCE holdings. Not sure how they will liquidate these holdings easily. Maybe a demerger of existing holdings might be a way forward, although this will also impact share prices on the two underlying investments as a result of new holders selling. Overall, not an easy situation. I'm not necessarily convinced that a wind-up of OCE is in the best interests of its shareholders. Any thoughts on a sensible way forward?
16/4/2006
05:18
vassily: Missed out on the recent news about OCE, Merit and Bralorne. If you have not read this too, read fron the link below. http://www.meritminingcorp.com/newsrel.htm Does the last piece of news (March 2006) mean OCE may have a life beyond early 2007? What do people make of the move to increase OCE's stake in Merit and reduced stake in Bralorne. Better risk management or better prospects, or both? The text below comes from the Merit 2005 Annual Report and indicates that OCE was not getting paid. Subsequently, OCE seems to have agreed a debenture (8% as opposed to 12%) and to take an even greater stake in company. "As at May 31, 2005 the Company had working capital of $8,366. On June 8, 2005, subsequent to the year end, the Company closed a private placement financing of $767,900 previously announced on May 17, 2005 (see "Financing Activities"). The Company has in the past relied on flow-through financing to fund exploration on its mineral properties and will continue to seek flow-through financing for on-going exploration in the future. The Company will also seek additional working capital as required to meet on-going corporate expenses and for future acquisition and development of properties. During the year ended May 31, 2005, the Company realized proceeds of $367,875 from the exercise of share purchase warrants. Pursuant to the exercise of the option to acquire a 100% interest in Gold City's British Columbia and Washington state assets on December 22, 2004, the Company assumed from Gold City a loan from ORCH. The loan, which is in the form of 4,817 ounces of gold, is repayable in August 2006. In connection with the assignment of this loan, the Company issued 250,000 common shares at a deemed price of $0.50 per share to ORCH on December 22, 2004. Interest on the loan, (12% per annum) is payable semi-annually, 60% in shares and 40% in cash. The Company paid the semi-annual interest payment due on the ORCH loan on January 31, 2005, in the form of $54,633.16 (40% cash) and 92,715 shares at a deemed price of $0.88 per share (60% in shares). The Company has not paid the semi-annual interest payment due at July 31, 2005 and, at the time of this report, is in negotiations with ORCH to re-structure the loan." Nice jump in Merit (MEM) share price recently. V
20/1/2006
06:56
vassily: These are the last two RNSs I can find for OCE & St. Barbara Ltd. See below. Seems to me OCE still has a stake, but who knows. I am dissapointed as OCE sold just as the St. B. share price lifted off. (See Chairperson's address below) Chairman's Address at 2005 AGM... "in the 12 months since our last annual meeting, St Barbara has achieved a high level of success...St Barbara's share price has risen from 6.5 cents on 16 November 2004 to 28.5 cents at the close of trade 15 November 2005." OCE sold a substantial portion of its holding at a low point! The price now is nearly $0.50!!! Is that 7.7 times the November 16th 2004 price? And this company actually produces gold. If they had waited they could have paid off some of OCE's debt with this (if they got in at a low price that is). Well... I am glad they might still have a interest. St. Barbara Mines Limited 19 November 2004 SHAREHOLDERS' REPORT Substantial Shareholder Notice Attached is a form 604 (Notice of Change of Interests of Substantial Shareholder) showing a modification in the interest held by Ocean Resources Capital Holdings plc to 10.13%. Ocean Resources Capital Holdings plc have reduced their holding from 107,480,547 shares in St Barbara Mines Limited to 72,480,547 shares. St. Barbara Mines Limited 03 December 2004 SHAREHOLDERS' REPORT Substantial Shareholder Notice Attached is a form 604 (Notice of Change of Interests of Substantial Shareholder) showing a modification in the interest held by Ocean Resources Capital Holdings plc to 4.89%. Ocean Resources Capital Holdings plc have reduced their holding from 72,480,547 shares in St Barbara Mines Limited to 35,000,000 shares.
18/1/2006
04:34
vassily: Upon further investigation, my post (307) was not correct (see below). St. Barbara Mines Ltd. (now St. Barbara Ltd.) did not merge with Defiance, therefore OCE does not have interests in Defiance or Rio Narcea. The good news, if OCE still has an interest in this one (?), is that St Barbara share price has been steadily going up over the last six months. In 2004 there was a key change in senior management. GS: FYI. I believe St. Barbara Mines Ltd. was swallowed by Defiance Mining, which was then swallowed by Rio Narcea Gold Mines Ltd in June 2004. http://www.rionarcea.com/s/NewsReleases.asp?ReportID=83802&_Type=News-Releases&_Title=Rio-Narcea-To-Acquire-All-Shares-Of-Defiance-Mining I assume OCE now holds some share of Rio Narcea (RNG). V
18/1/2006
03:25
vassily: Willo: Thanks for the information on Scorpio. I think what I meant to write was people have shown more interest in silver juniors of late as the silver price climbed. Despite my mistake, it is still good news that Scorpio has something positive to report and that OCE might benefit in the future. GS: Thanks for the Dec 05 NAV. I think Jan 06 NAV will be higher still. I note that OCE price rose a little near end of trading. V
19/2/2005
13:00
lovegod: also central african mining has been motoring up will this reflect in oce share price ?
15/7/2004
16:49
greekman: rambutan2. I agree that greystar look a good company but the cash is for a feasability study and profits are not forcast for a few years according to a tip site I found today. The site gives a warning to investers that it may be best to wait for the results of the study before investing in greystar. I feel that this has reflected on OCE share price although I cant see why unless OCE are to be left with unsold shares from the placing.Can anyone with more knowledge re placings put me right if im wrong. Thanks Greekman.
19/12/2003
17:52
richgit: Date : December 19, 2003 Ocean Resources May Undergo Reassessment in 2004. Ocean Resources Capital Holdings may have been among the worst performers in London's AIM mining sector this year, but in large part that is because it is misunderstood by investors according to stockbrokers Collins Stewart. To understand best how this came about one has to look back to the original aims of the company. It was to be run on the lines of an old fashioned mining finance house in that it would be able to make acquisitions and take a hand in the management of the companies in which it invests. Most important for investors, it would pay a dividend. In order to do so it tended to invest in convertible stocks with a 10 or 12 per cent coupon issued by the companies with which it became involved. The companies got the benefit of vital mezzanine finance, while Ocean Resources could offer a yield to institutions who are so often prevented from investing in junior resource stocks because of the lack of income and marketability. . Naturally this meant that the companies in its portfolio are in production, or only a heart beat away, so that cash flow could be generated to pay the coupon. Even before it listed in February 2003 deals worth getting on for £40 million had been agreed with companies to swap shares in Ocean Resources for their convertibles. The idea was that the shares in Ocean Resources issued to the companies in return for these convertibles could then be placed with institutions, providing vital cash for development of their projects or for further expansion and exploration. The problem was that all the investee companies pressed the exit button once the two month escrow period ended to get their cash and this put downward pressure on the share price. Not unnaturally fund managers stood back to see how far the shares would fall. There was the additional problem that there were a number of unlisted companies in the portfolio and this made it difficult to put a realistic value on it. Indeed at the end of June Ocean had to bite the bullet and take a write-down on the portfolio amounting to £10.3 million which was taken through the Profit & Loss account. As a result the company was no longer able to pay any dividends so it was back to the drawing board. The main decision was restrict the number of shares in Ocean issued in future transactions to 10 per cent of the current issued capital for the next two years. By that time the company should be realising cash from sales of its original investments and will be able to reinvest it in new holdings. The companies in Ocean's portfolio also had problems as they were selling Ocean shares at well below anticipated levels. As a result they were having to cut back on work plans to avoind running out of cash.. Ocean recognised this and , in line with the approach of working hand-in-hand , have agreed to re-negotiate the investment agreements between Ocean and the affected parties. In return for a reduction in the convertible stocks they have accepted ordinary shares and, in some cases, warrants. This has taken the pressure off the companies and allows Ocean to adopt a slightly more aggressive investment policy by trading these shares and warrants. Despite being effectively forced on the company, these changes should prove very timely. When Ocean was first set up the climate for funding small mining companies was very different. Now money is actually chasing the best of them as was exemplified recently by African Eagle. Share prices are reacting rationally to good or bad news and there is a ground swell of interest in the sector from private investors which adds a degree of liquidity to even the smallest companies. In the background metal prices have been moving in the right direction thanks in part to a combination of Chinese demand and the falling US dollar. Thus mining is no longer a sector that investors can ignore and the search is on for bombed out stocks. Ocean fits the bill as a result of its history and it offers a portfolio of lively juniors where the risk is spread across countries of operation and commodities. The ultimate attraction is that the companies in the portfolio should start to generate cash within the next year to 18 months and there are a number which will also list and thus add real value. The mini-mining house concept is still in place and the management is described by Collins Stewart as being imaginative and resourceful. As an example Ocean is acquiring an FSA registered broking/investment advisory business which will trade its stocks as well as others and provide research and new ideas. The idea is to improve liquidity even among some of the smallest stocks. Maybe the market will take a new look at Ocean in 2004.
Ocean Resources Capital share price data is direct from the London Stock Exchange
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